By Dean Deutz, vice-president of private wealth at RBC Wealth Management
Another tumultuous week in global markets has many investors wondering how long this roller coaster ride will continue, and whether they need to get off at the next stop.
As Kelly Bogdonova, vice president and portfolio analyst at RBC Wealth Management, explains, this week’s losses are not what they used to be. “Back when the Dow was at 10,000, that same point decline would have represented a 12 percent plunge,” she writes.
But just as markets have recovered in the past – like they did after the 10 percent drop in summer 2015 – this too shall pass. Investors who keep that adage in mind, rather than make abrupt changes to their portfolios based on today’s headlines, should fare the best in the end.
Volatility may be difficult to stomach, but it’s hardly unprecedented. Markets typically experience a 10 to 20 percent correction roughly every one to two years. Indeed, over the course of history, the financial markets have experienced many corrections - declines of at least 10 percent from recent highs - and each time, eventually recovered lost ground and moved to new heights.
How investors react during these periods of decline is critical to their long-term success.
Following the market correction of 2015, RBC Wealth Management conducted a poll and asked Americans how they reacted. The vast majority (71 percent) with investable assets didn’t panic and instead opted to maintain their positions. In fact, only 4 percent sold and got out of the market entirely.
Investors should exercise similar discretion in today’s market. But remaining calm during a correction doesn’t mean investors should simply sit on the sidelines.
In a downturn, just about everybody takes a hit, but if you were particularly affected, you might be over-concentrated in just a few types of stocks. If that’s the case, you may want to take this opportunity to consider whether you need to further diversify your holdings. You can help reduce the impact of volatility on your portfolio by owning a mix of domestic and international stocks, bonds, government securities, certificates of deposit (CDs) and possibly even alternative investment vehicles, including real estate.
Another thing to keep in mind is that a market correction, by definition, means that prices have dropped for most stocks, including the ones that represent strong companies with favorable prospects. When prices are down, that could signal a good time to buy for many investors,. Younger investors with longer investment horizons are the most likely to benefit from purchasing additional investments when prices are low.
The bottom line: don’t jeapordize your long-term investment strategy out of fear that a few bad weeks or months in the market will persist. If you’ve created a strategy that reflects your risk tolerance, time horizon and financial goals, and if you make needed adjustments over time, you’ll give yourself the ability to look past today’s headlines.
The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.